ITRAF Annual Conference December 04-05, 2020

India

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The International Tax Regime

and

Global Power Shifts

Eduardo Baistrocchi

Forthcoming in the

Virginia Tax Review, Vol. 40, No. 02, 2021.

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Topics

1- The Context: three globalisation booms and three

busts

2- Research Question

3- Theoretical Framework

4- Finding – The Spiral Evolution

5- A Theory of International Taxation

6- Conclusion

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Context:

three globalisation booms and three busts

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Concert of Europe system League of Nations system United Nations systemThe fourth

globalisation

1815 1914

1919 1929

1946 2015

Geopolitical disruptions, major wars and anti-globalisation backlashes

Starting year?

Question

Is there correlation between global power

shifts and the evolution of the international tax

regime (ITR) since its emergence in the

1920s?

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Question- Relevance

Analysis is relevant because it brings normative lessons

that could solve the new challenges that the ITR is

facing in the early 21st century:

the increasing difficulties countries are facing in

reaching consensus on how to deal with international

taxation issues in emerging areas. Global digital

commerce is a case in point.

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Theoretical Framework

Rules and Standards, as elaborated in the law and

economics literature.

A jurisdiction can give content to norms ex ante

(via rules) or ex post (via standards).

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Theoretical Framework

Examples:

Rule: ‘No driving in excess of 55 miles per hour’ is a

rule. Violations are proscribed ex ante and no judgment

is required by the subject of the regulation.

Standard: ‘Drive carefully’ is a standard. It requires

contextual judgment from the subject and precise

prohibitions are determined ex post through case law or

a functional equivalent.8

Theoretical Framework

Rules and standards differ in at least the following crucial

dimension:

(i) the distribution of power within a legal system.

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The Rule–Standard Spectrum

Patterns Examples

#1 Pure Rule The term “national”

#2 Ex-ante Procedural Regulation APAs

#3 A Rule Embedded

in One or More Standards

A Place of Extraction of

Natural Resources

#4 A Standard Embedded in One or More

Rules

Tax Treaty Interpretation

#5 Ex-post Procedural Regulation Tax Arbitration

#6 Pure Standard Principal Purpose Test

Finding

There is usually a correlation between global power shifts and the evolution

of the ITR.

The hegemon normally prefers a rule–based system over a standard–based one

given the ITR’s decentralized competitive structure. This hegemon’s

preference is based on the assumption that the former limits the

decentralization of power within the ITR more than the latter does to a

growing, decentralized global network of countries.

When external shocks (such as technological and/or regulatory financial

innovation) emerges making the rule–based system unworkable, there is

normally no better option for the hegemon than to accept an ITR shift

towards the standard–based end of the spectrum, ideally under the

hegemon’s control until the hegemon’s collapse.

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Regulatory shocks since the 1980s: e.g., Financial Deregulation (Reagan-Thatcher)

Technological shocks since the 1990s (e.g., internet)

Global Power shifts in a Nutshell

The transitions from the first era to the second era and from the second era to the

third era correlate with power shifts in the world.

The transition from the first era to the second era correlates with the power shift from

the U.K. to the U.S. in the 1930s.

Likewise, the transition from the second era to the third era correlates with an

emerging power shift from the West to the East, mainly China and India, since the

early 21st century. Emerging countries again contribute over 50% of global economic

output in purchasing power parity terms, as was the case before the first Industrial

Revolution.

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The First and third Standard-based Era: Examples

1928 2016

League of Nations Draft

Model, art. 5

‘The competent

administrations of the two

Contracting States shall

come to an arrangement as

to the basis for [income]

apportionment’.

OECD MLI, art.

17(3)(b)(ii)

‘[I]ts competent authority

shall endeavour to resolve

the [corresponding

adjustment] case under the

provisions of a Covered Tax

Agreement relating to

mutual agreement procedure

[governed by article 25 of

the OECD Model]’.

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A rule-based regulation: An Example

The League of Nations appointed Sir Stamp as one of the four

economists to study the problem of double taxation

internationally in 1923.

Interestingly, Stamp suggested a rule for solving the double

taxation problem outside the British Empire. Indeed, Stamp

maintained that the best available method for solving the double

taxation problem was exclusive residence jurisdiction, i.e., no

source taxation.

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A Theory of International Taxation

A new logic has emerged in the strategic interaction

existing between G20 countries and non-G20 nodes in

the last century. G20 countries increasingly compete

against each other for capital, just as private firms

compete for market share in a context of global power

shifts.

Baistrocchi, Eduardo A. and Hearson, Martin, Tax Treaty Disputes: A Global Quantitative Analysis (August 30, 2017). E. Baistrocchi, ed., A Global Analysis of Tax Treaty Disputes, Cambridge University Press, 2017., Available at SSRN: https://ssrn.com/abstract=3045917

A Theory of International Taxation:

Strategic Interaction between Three Oligopolies in a context of

external shocks

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Non-G20 hubse.g. Ireland

ITR

Market jurisdictionse.g., India

MNEse.g., Apple

Global power shifts and other external shocks

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1960s

G20 countries are shown in

black and others in grey. The

size of each country’s node

indicates the average share of

disputes in other G20

countries that relate to that

country. For example, the US

has the largest node, which

tells us that, on a simple

average, US tax treaties make

up the greatest proportion of

disputes in G20 country courts

(excluding cases in the US

itself).

The thickness of each line

indicates the average share of

G20 disputes involving that

treaty network.

A country’s location is

determined using the

technique of principal

component analysis.

Countries that play the most

similar roles in the G20

dispute network are placed

closest together. Countries at

the edges present the greatest

differences, but this includes

countries with large numbers

of disputes concerning their

treaties, which form poles.

Other countries’ positions

relative to these poles indicate

how closely connected they

are to the poles.

The Evolving Network of Tax Treaty Disputes

Baistrocchi, Eduardo A. and Hearson, Martin, Tax Treaty Disputes: A Global Quantitative Analysis (August 30, 2017). E. Baistrocchi, ed., A Global Analysis of Tax Treaty Disputes, Cambridge University Press, 2017., Available at SSRN: https://ssrn.com/abstract=3045917

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2000s

In the 2000s, the US,which has consistentlybeen among the largestfoci of treaty disputes,becomesoverwhelminglydominant, draggingmost other participantsin the network in itsdirection. India, whichexperiences anunparalleled upsurge intax treaty disputes inthe 2000s, has pulledaway from the systemalone.

We call this dynamic theCopernican revolution.This is so because 3non-G20 hubs are nowin the centre of theuniverse of leading taxtreaty cases in G20countries. Indeed,Switzerland is in thecentre from the 1970s;The Netherlands andBelgium are also in thecentre from the 1990sand 2000s, respectively.

Tax Treaty Disputes between G20 Countries and Non-G20 Hubs in the 1960s

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Tax Treaty Disputes between G20 Countries and Non-G20 Hubs in the 1990s

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The Spiral Evolution: Analysis

4.1. Assessing the Theory against the Empirical Evidence

4.1.2. Why the Evolution Has Been Spiral

4.1.3. The ALP Evolution: From the Rule End to the

Standard End of the Spectrum

4.1.4. The Spiral Evolution, Global Political Shifts and

Innovation

4.1.5. The Spiral Evolution, Countries and MNEs

4.2. Implications: A Default Rule-based ITR to deal with

Opportunistic Behaviour and Inequality

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Conclusion

Global power shifts and innovation at the

technological and financial regulatory

levels have probably been two central

driving forces in the evolution of the ITR

since its origin in the early 20th century.

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